Reflated economy must be Japan’s priority, claims Moody’s

Hayami has argued that the bank has already deployed all available orthodox methods in its attempts to address falling prices. In so doing it has flooded the market with liquidity. Nevertheless, it is argued by some that the bank has used deflation in an attempt to coerce the government into adopting structural economic reforms. Hayami has doggedly ruled out setting an inflation target.

Moody’s said reflating the economy, while not a panacea, would reduce Japan’s problematic and growing debt burden.

The agency said it would lead to a rise in domestic gross national product that, supported by other policies, would "lead to deficit reduction as a percentage of GDP". Last year, the rating agency downgraded Japanese sovereign debt to A2.

While Moody’s added that failing to appoint a recognised inflation-fighter would not further harm the rating, the agency believes rigid adherence to present policies is not viable, and that breaking the cycle of deflation is critical. Figures released yesterday indicate that money supply growth in December had slowed to the lowest level in two years.